Thursday, 11 August 2011

Switzerland considers pegging to the euro

With the world's main currencies in crisis, the historically stable Swiss Franc has exploded in value over the past year. This has had a disastrous effect on the Swiss economy, as its exports and tourism industries struggle under the effects of a drastically overvalued franc.

This was in clear evidence earlier this month when I took a trip on the Glacier Express train across the Swiss Alps with my father. Ordinarily this scenic tourist train would be packed in August, having sold out months in advanced. But our train was nearly empty. When we finished our journey in Zermatt, home of the Matterhorn, the city was dead quiet. It looked like three-quarters of the rooms in our hotel were vacant.

It makes sense. After all, who can afford a vacation in Switzerland these days? It was already an incredibly expensive country, and the current exchange rate close to one euro to one franc (three years ago it was 60 cents to one franc) makes it unaffordable for most tourists from France, Germany and Italy. When my father moved from the US to Zurich in 2006 the exchange rate was 80 US cents to one franc. Today it's $1.37 to one franc. Given that a value meal at McDonalds costs 15 francs ($20), it's a difficult place to be if you don't make a Swiss salary.

Yesterday the Swiss Central Bank announced they would attempt to weaken the franc by increasing the liquidity to the Swiss money market, saying that the massive overvaluation of the Swiss franc "poses a threat to the development of the economy". But Bern's policy options for holding back the value are limited. The only measure that would guarantee an end to the runaway franc valuation is to take the currency off the exchange market - by pegging it to the euro.

This is a measure that would have previously been inconceivable, as the Swiss regard their currency as a foremost symbol of their national pride. But in an interview published today in a Swiss newspaper Swiss central bank Vice President Thomas Jordan said they are considering exactly such a move. Given that the euro and the franc are now nearly at parity, they may not be able to resist the pressure to peg the franc to the euro.

Several other countries in Europe maintain such a peg to the euro, most notably Denmark. But doing so means you lose the ability to set your own monetary policy, and the country's central bank loses sovereignty. This may prove to be too bitter of a pill for the Swiss to swallow.

But with share prices plummeting for Swiss companies involved in export - including their famous pharmaceutical brands - the Swiss government knows it has to take drastic action of some sort. Pegging to the euro may be their only option.

3 comments:

Anonymous said...

Switzerland will never adopt the euro, it was a good decision to stay out of it and a strong currency is a great thing.

Anonymous said...

"Several other countries in Europe maintain such a peg to the euro, most notably Denmark."
Why is it that Denmark is the one that is the most "notable"?
It wouldn't have anything to do with the fact that out of all the countries pegged to the euro, Denmark is the only "western" one, therefore the only "notable" one, would it?
If you want to be a true journalist I suggest you dial down the bias. It'll do you good.

Kallisti said...

@Anonymous2: I would say the notability comes from Denmark being the only country that does not have to work towards joining the Euro and still pegs its currency to it. You see what you want to see, especially when looking for bias in others.